In Praise of a Weaker Dollar

It's taken for granted that America enjoys a huge advantage from the fact that the dollar is the world's global reserve currency, representing more than 60 percent of the money held in central banks. The euro, a distant second, represents only 26 percent of reserves. But a new and contrarian report from the McKinsey Global Institute (MGI) calls that old wisdom into question.
The Idea: How could it be a bad thing to be the world's currency of last resort? "It makes the dollar much higher in value than it really should be, and thus hurts both exporters and American companies that compete with importers," says Richard Dobbs, an MGI director and author of the report. In the past it was assumed that the lower borrowing costs resulting from the dollar's favored position, as well as the benefits accrued from the ease of doing business in the world's most liquid currency, would easily offset this problem. Not so, says McKinsey.

The Evidence: According to MGI, in 2007 and 2008 the net benefit to the U.S. of the dollar as a reserve currency was a mere $40 billion to $70 billion a year--just 0.3 to 0.5 percent of GDP. What's more, in the worst-case scenario run by McKinsey, the dollar effect actually became negative in 2009, costing America about $5 billion a year. -McKinsey believes up to 1 million U.S. jobs have been lost due to an overvalued currency, a trend that's been exacerbated this year as jittery investors fled to the dollar as a safe haven. Indeed, the report suggests that export-oriented U.S. firms might gain ground on European competitors and be in a position to help offset high unemployment if the dollar was allowed to depreciate by about 10 percent. Exchange rates can make or break companies; McKinsey notes that the profits of Korean powerhouse Samsung are twice that of the top nine Japanese competitors combined, in part because the -Korean currency is so much cheaper than the Japanese.

The Conclusion: A weaker dollar is likely coming, whether the U.S. government favors it or not. A survey of global executives found that only 18 percent expect the dollar to be the main global reserve by 2025 (with most expecting a basket currency system to take its place). The good news is that the demise of the dollar could make America richer.

In Praise of a Weaker Dollar | News